Long-term rates are finishing their fourth-straight week in the same place: the 10-year T-note in the 4.6s, mortgages 6.25-6.375 percent. This trading band is too tight to last much longer, and at week end the majority opinion has shifted (again) to favoring a modest drop out of the bottom of the range.

The current economic circumstance is as weird and out of historical pattern as the semi-recession 2001-2003. Global integration has made obsolete most of the business-cycle instincts useful since WWII; the business cycle lives, but it’s not your Dad’s.

Today we have the Fed toward the end of an inflation-fighting campaign, credit-sensitive housing and autos in recession, just as in historical pattern, but the anomalies are in charge. Three of them: 1) $65 oil should have caused a bad inflation problem, but did not because global wage competition has intercepted the wage-price spiral; 2) despite a tight Fed, the corporate world is in excellent earnings and credit strength because of global trade, doubled since 2001; and business strength means that 3) the unemployment rate is at an unthinkably low 4.5 percent one year after the Fed’s rate peak.

If we are to have a deeper economic slowdown, squeezing out the last inflation risk and opening the door to a Fed ease, the only cause available would be more serious effects on the consumer from the housing recession.

I have maintained a housing-analysis position likely to annoy just about everybody, claiming that housing is neither at or near bottom, nor is it a price-bubble. The historical evidence is compelling: local housing markets tend to be flat for long periods, then price-spike in response to accumulated purchasing power, and then return to flat for periods correlating to the altitude of the spike. Big spikes are followed quickly by minor declines in price, modest single-digit percentages, then flat, flat, flat.

The newest housing reports give me pause. They are awful. The April run-down on home building from Credit Suisse is an off-the-table affair, and their study is one of the few hard-data pieces. In 37 metro areas, April conditions deteriorated in 18, and improved in one. In CS’ alpha scoring system, the best grade in the United States was a B- in Salt Lake City, eight in the C range, 18 Ds and 10 Fs — including the entire states of California and Florida. This is a home-building report, not resale, but carry this thought: builder weakness is not a sign of builders pulling back; these guys are desperate to sell enough houses to keep the engine going … and they are failing.

One of the very best housing sources, utterly dispassionate, is the market guidance by mortgage insurance companies to their underwriters. MGIC’s newest quarterly analysis shows not the slightest sign of bottom: of 73 metro areas, seven are strong, and 27 are weak, soft or softening. Changes of condition from the prior quarter, as of April: six softening, three weakening, none improving.

The mortgage bankers’ weekly measure of loan applications is steady, but I can’t get good information about pull-through to closing. New mortgage-derivative issuance (CDOs) cratered 46 percent in April; partly structural pull-back, partly a shortage of loans.

Of Credit Suisse’s April survey respondents, 72 percent testified that mortgage credit was tougher (no kidding … What religion is the Pope? What do bears do in the woods?) One can argue that no-go applicants are weeded out in the pre-app process and never hit the “application” count, and the approval/application ratio is as-was … but one can also argue that an army of starving mortgage pushers are taking apps from anyone breathing (and some not), turndowns and cancellations rising. We’ll see.

And we’ll see the effect on the consumer. The April collapse of retail sales to flat may be an effect of housing and other crunches (energy and incomes), or a transient. Evident consumer weakness may percolate to business, or may not, but the all-OK bunch is losing ground: all week long, the stock market traded on prospects for Fed easing, not exuberance. A stay-put Fed knocked off 144 Dow points; the lousy retail number has put half back. That’s not exuberance, that’s defense.

Lou Barnes is a mortgage broker and nationally syndicated columnist based in Boulder, Colo. He can be reached at lbarnes@boulderwest.com.

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